Property and infrastructure leverage still on the high side

The Reserve Bank is satisfied with the state of Australia's collective corporate balance sheet, saying that companies have been able to refinance as needed.

The head of the RBA's domestic markets department, John Broadbent, said yesterday that tighter terms combined with reduced demand had led to a decline in business credit but that loan finance was still available.

The composition of external funding had changed markedly over the past year, with net debt funding declining sharply and corporates raising significant amounts of equity.

Listed corporates have raised a record amount of equity this year, totalling some $60 million. This compares with an annual average of around $20 billion in the three years prior to the financial crisis.

The exception to these general comments was the real estate and infrastructure sector, where companies faced constraints in their operations as a result of tighter lending standards.

This issue was raised by RBA governor Glenn Stevens last week when he said: "Perceptions by lenders of the riskiness of (property) development in some cases are probably overdone at the moment, given the strength of the underlying fundamentals on the demand side for accommodation."

Broadbent said most of the equity capital raised had been used to retire debt or restore gearing ratios, rather than for investment or acquisition. As a result, overall corporate gearing has declined by 20 percentage points over the year to around 65 per cent, close to its long-term average.

Real estate and infrastructure companies have faced the most difficulty getting their gearing down because, although the sector has raised $20 billion of equity this year, asset writedowns over the same period have kept gearing ratios high. The average gearing ratio for the property and infrastructure sector is 105 per cent.

Broadbent said companies have been able to fall back on internal funding because earnings had remained resilient. "Cash profits for the corporate sector have been fairly steady at around $100 billion annually since mid 2007."

The shift to internal funding and from debt to equity as an external funding source has had most impact on the business of foreign banks, which concentrate on the upper levels of the corporate market. Local banks service the SME and middle markets, which do not have the same access to the equity capital market or corporate bond market.

Broadbent said there had been a change in the composition of debt funding over the past couple of years. Intermediated borrowing has declined this year, while bond issuance has increased.

"In the early part of the financial turmoil, corporates drew upon their credit facilities from banks as capital markets dried up, pushing up business credit growth in excess of 25 per cent. Bond issuance slowed sharply to an average of just over $1 billion per quarter in the latter half of 2007 and early 2008, compared with $5 billion in previous years.

"As markets have thawed, investor demand for investment grade paper has returned and issuance has resumed. Corporate bond outstandings have risen by over 10 per cent since mid 2007 to total $150 billion."